Amina Sammo
School of Finance & Financial Management, Business University Costa Rica
Email: minasammo@gmail.com
Abstract
For centuries, men have held the ambition to be able to beat the market consistently. Year after year many traders try new strategies to be able to win consistently in the market. However, their strategies predictably fail creating the belief that the market is invincible and that the ability to beat the market consistently is nothing but a pipedream. However, in the early 1990’s this pipedream came to life in the form of a fund called Long Term Capital Management. This fund was created by a bunch of Nobel laureates who had created the option pricing formula. It ran successfully for some years and gave an average return of 40% after deducting fees and commissions. This makes it a gross return of close to 53% per annum. What’s even more interesting is that fact that the founders of this fund ran it like clockwork meaning that there were no leveraged wild bets being placed on the market. Rather, they had a thorough, systematic plan which worked step by step with little volatility. High returns and low risk made them arbitrageurs i.e. people who generate risk-free profit. However, this massive arbitrage operation came to a grinding halt. The fame and aura of invincibility that surrounded both Long Term Capital Management fund and its founders was destroyed as this fund created a spectacular collapse leaving a trillion-dollar hole in the markets. In this article, we will discuss the rise and fall of the Long Term Capital Management fund.
Keywords: Failure of Long Term, Capital Management (LTCM)
